Working Capital Project Report

1
A Project Report
ON
Working Capital Management
Submitted in partial fulfilment of the requirement for the degree of
MBA (General)
By

Supash Alawadi
(Roll no.-151)
Under the guidance of
Prof.Rajita Dixit
A Study Conducted At
Varroc Engineering Ltd., Pantnagar

At
Institute of Management & Entrepreneurship Development
Erandwane, Pune-38
(Year 2010-12)
2

BHARTI VIDYAPEETH UNIVERSITY, PUNE

INSTITUTE OF MANAGEMENT AND ENTREPRENUERSHIP DEVELOPMENT, PAUD ROAD, ERANDWANE
PUNE-38

CERTIFICATE OF COMPLETION

This is to certify that Mr. Supash Alawadi is a bonafide student of MBA program of the university in this
institute for the year 2010-12. As a part of the University curriculum, the student has completed the project
report titled
Working Capital Management in Varroc Engineering Ltd. The project report is prepared by the student
under the guidance of
Prof.Rajita Dixit.

(Teacher Guide) Program Co-ordinator Director
Date:
Place:

3

4

ACKNOWLEDGEMENT

Expression of feeling by words makes them less significant when it comes to make statement of
gratitude.
There are few moments in life when you really feel like expressing gratitude and sincere thanks. I take this
opportunity to express my deep gratitude to persons who have helped me.
First of all, I express my sincere debt of gratitude to the Almighty God who always supports me in my
endeavors.
The Summer Training Project would not have been a success without the timely guidance of Mr Tapas
Kumar Sadhu, Deputy Manager Finance and the proper guidance of Prof.Rajita Dixit.
I enjoyed full freedom to move in the organization and collect the required information from the other
department as well.
And lastly I am also thankful to our honoured faculties for their constant support and for granting the
opportunity to gain practical knowledge through the summer training programme.

5

CONTENTS

Chapter 1- COMPANY OVERVIEW
Page No.
About Varroc. 08
Mission.. 09
Vision. 09
Core and Corporate Values 10
Quality policy 11
Environment health and safety policy 12
Historical Background of a Company 13
Clients. 14
Varroc Group,Clients,Name and location 15
Products.. 16-19
Sales Turnover 20
Awards 21

Chapter 2- Introduction of division where Internship was taken -
Page No.
About Varroc Engineering (VEPL-PN) .. 22
Objective .. 23
Market served ... 24
Turnover 24
Organization Structure .. 25
Functions of all department -

Purchase 26
Finance .. 27
IT ... 28
Store... 29
HR.. 30
Main competitors 31
Sources of Finance. 31
Future Plan. 31
6

Promoters of the Company 32
SWOT Analysis of Varroc (VEPL-PN).... 33

Chapter 3 - Working Capital Management
Working Capital Management. 34-40
Operating cycle Analysis of Four major player 41-46
Working Capital Analysis. 47-64
Cash Management. 65-70
Cash Cycle Analysis with its Competitors 71-75
Practices In Varroc for Cash Management 76-79
Inventory Management.. 80-83
Account Receivables.. 84
Chapter 4- Analysis
Research findings 85
Recommendation. 86-87
Conclusion 88

Bibliography

7

EXECUTIVE SUMMARY
The study of the working capital management is crucial for any organization specially the manufacturing
firms as the profitability of the company depends on the operational efficiency.
Decisions relating to working capital and short term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and its short-term
liabilities.
The objective of the project is to analyze the difference between the theoretical and the practical aspects
related to the Automobile Industry and further analyzing the practices involved in the Varroc Engineering
PVT. LTD.
The methodology used for the analysis part are , the ratio analysis for both the financial as well as the
working capital ratio analysis, operating cycle analysis and the working capital cycle analysis. And the
analysis of cash cycle on the basis of study of cash turnover and component of cash cycle.
The study involves the exploration of the below topics.
Cash management. Identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs. Cash management seeks to accomplish cash cycle at a
minimum cost and to achieve liquidity and adequate control at same time over cash position to keep
firm sufficiently liquid and to use excess cash in some profitable way.
Inventory management. Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials - and minimizes reordering costs - and hence
increases cash flow; Supply chain management, Just In Time (JIT), EOQ Analysis etc.
Debtors management. Identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by
increased revenue.

The projects detailed analysis rests on the Cash Management which includes the theoretical aspects in detail
relating to the motive of maintaining cash balance, objectives of cash management, strategies to minimize
operating cash balance, and investing surplus cash in marketable securities based on their risk, marketability
and yield.
8

CHAPTER 1 Company Overvie
VARROC GROUP

9

ABOUT VARROC
Varroc group is a private group.
The Varroc group manufactures and markets a highly diversified portfolio of automotive components
and subassemblies for two wheelers, three wheelers, four wheelers for sale in domestic and as well as
overseas.
In the four wheeler space the group has ventured only into plastic mounded component, engine
valves and forged component.
The 22group structured into two separate entities: Varroc Polymers Private limited (VPPL) and
Varroc Engineering Private limited (VEPL).
Varroc Polymer manufacture polymer based components and Varroc Engineering manufacture
electrical, electronic and mechanical components.

Two Wheelers
62%
Four Wheelers
33%
White Goods
5%

0%
Market Segment
10

MISSION
Varroc aims to become global player in the business of component supplies to automobile and white goods
industry across India and select foreign markets like USA, Europe, SAARC and ASIAN countries, growing
at 25% CAGR with 15% of the value of products being exported by the year 2010.

VISION
We are committed to serve the society by adding value to the Customers, Employees, Suppliers,
Shareholders and the Community at large in terms of:
Providing Customer Satisfaction by offering Reliable Products and Services at Competitive Prices
Providing an environment conducive to the development, growth and satisfaction of employees
while fulfilling their reasonable aspirations.
Providing adequate returns to the shareholders while nurturing business growth.
Contributing to the well-being of the society and conducting ourselves as a responsible corporate
citizen known for integrity and ethics.

11

CORE VALUES
CORPORATE VALUES
12

13

14

HISTORICAL BACKGROUND OF COMPANY

Year 1984
Increasing Trend in Usage of Automotive Plastics in India due to advent of Suzuki.
Year 1988
Increasing Demand for Consumer Electronics and White Goods in India .
Year 1990
Inception of Operations for Plastic Moulded Components for Automotive and Consumer Electronics
Industry.
Year 1998
Inception of Operation for Metallic Components such as Engine Valves and Electrical Component like
2W Electronic Ignition System.
Year 2007
Foray in Europe in Forgings Space by Acquiring IMES Spa Italy and Poland.
Year 2008
Restructing of the Varroc Group into Varroc Polymer Pvt. Ltd. and Varroc Engineering Pvt. Ltd.

15

CLIENTS

16

NAMES AND LOCATION OF COMPANY

Off roll
Staff Workers Contract
1 VEPL - I Aurangabad 135 78 57 270
2 VEPL - II Aurangabad 23 13 97 133
3 VEPL - III Pune 707 0 204 911
4 VEPL - IV Aurangabad 109 0 57 166
5 VEPL - VI Pune 96 0 220 316
Electrical Total 1070 91 635 1796
6 DIPL Aurangabad 645 37 349 1031
7 VEPL - V Aurangabad 617 0 185 802
8 VEPL - VII - Valves Aurangabad 592 0 112 704
9 VEPL - VII - Forging Aurangabad 98 0 72 170
10 VESPL Pune 54 0 10 64
Metallic Total 2006 37 728 2771
11 VPPL-I Pune 379 0 183 562
12 VPPL-II Pune 278 0 161 439
13 VPPL-III Aurangabad 50 0 13 63
14 VPPL-IV Aurangabad 139 0 113 252
15 TDC Aurangabad 134 0 16 150
16 VPPL-BN Binola 30 0 161 191
17 VPPL-GN Noida 76 0 241 317
Polymer Total 1086 0 888 1974
18 VPPL-PN Uttaranchal 256 0 192 448
19 VEPL - CORP Corporate 136 0 28 164
20 VPPL - CORP Corporate 48 0 0 48
TOTAL 4602 128 2471 7201
Sr. No. Plant Location
Manpower As on 31/08/2010
On roll
Total
17

DIVISONS

1.

2.

3.

18

PRODUCTS

This Division manufactures the following :
Injection moulded engineering plastic components.
Multilayer co-extruded thermoplastic sheets.
Injection & compression moulded automotive and Allied rubber products.
Polyurethane foam seat assemblies.
Rear view mirrors.
Air cleaner assemblies.
+
19

This Division manufactures the following:
AC Generators.
Digital CDI.
Digital Regulator Rectifier.
Starter/ Wiper Motors.
Switch Assemblies & handle bar assemblies for motorcycles.
Lighting systems for motorcycles, LED Lights.
Electronic clusters.

20

Engine Valves.
Crank Pins for motorcycle.
Hot, Cold & Warm `forged Machined Components.
Catalytic converters for 2W, 3W, 4W.

21

SALES TURNOVER

22

AWARDS & APPRECIATION

The Varroc-IMES transaction was awarded the Best Acquisition by a Foreign Company in
Italy for a year 2007.
Kaizen Championship Trophy for the year 2007, which was conferred upon by the TPM Club
of India. (Kaizen Award has been constituted for promotion of Kaizen culture amongst Indian
Industry by the TPM club of India.
Varroc wins ACMA Gold Trophy for excellence in Quality and Productivity.
VEPL-1,VEPL-4,VEPL-6 Plants got Awards from Bajaj Auto Ltd. for outstanding Quality
Performances in this year(20.10.2007).
BAL TPM AWARD was presented to VEPL-6.
VEPL-3 received the Bajaj Silver Award for Quality Supplier.
The Appreciation Award was given to VPPL-4 at the Kaizen Competition in Nasik.
Varroc Group won accolades in the form of appreciation from clients like Bajaj Auto, LG,
Honda and Caterpillar.
Honda Award for best Quality Supplier for the year 2007-2008.

23

Chapter 2 - FIRM WHERE INTERNSHIP UNDERTAKEN-
VARROC ENGINEERING PRIVATE LIMITED
(VEPL-PN)

24

INTRODUCTION OF VEPL-PN

VEPL-PN plant established in 2007.
Total manpower 450 nos.
VEPL-PN plant manufacture subassemblies for Bajajs Discover-100 cc, Discover-150 cc,
Platina-100 cc, Platina-125 cc and pulser-135 cc bike.

OBJECTIVE OF VEPL-PN
To manufacture component that are in perfect accordance with the given specification given by
customer.
Deliver quality product efficiently on time.
To create a corporate system that maximize the efficiency of Production system.(Overall
efficiency improvement).
Create system for preventing the occurrence of all losses on the front line and is focused on the
end product. This include system for realizing zero accidents, zero defects, and zero failures in
the entire life cycle of product system.
Providing customer satisfaction by offering reliable product and service at competitive price.
Providing an environment conductive to the development, growth and satisfaction of employee
while fulfilling their reasonable desire.
Providing adequate return to the shareholders while nurturing business growth.
Conservation of Natural Resources.

25

VEPL-PN served only Domestic market. Its 98% sale is from Bajaj auto limited.

TURNOVER
FISCAL YEAR TURNOVR
2007-2008 95 crore
2008-2009 120 crore
2009-2010 211 crore
2010-2011 500 crore

Bajaj group
98%
Non bajaj group
2%

0%
0%
Sales
26

ORGNISATION STRUTURE

Sumeet
Jhamb
Purna
Sadashiv
Tapas Sadhu
Narender
Singh

Anurudh
Shrivastava

Ashwani
Sharma

Narender
Singh

Narender
Singh

Saurabh
Tiwari

Harsh KohlI
PLANT HEAD
METTALIC POLYMER
ELECTRICAL
PURCHASE
HUMAN
RESOURCE

FINANCE
I.T
ENGINERRIN
G
QUALITY
STORE
DISPATCH
MAINTENCE
Pradeep
Verma

Anil
Choudhary

R P D
Mishra

DEPTT.
27

FUNCTION OF ALL DEPARTMENTS
SCOPE

PURCHASE DEPARTMENT
OBJECTIVE OF PURCHASE DEPARTMENT
TO ACHIEVE ZERO PRODUCTION LOSS DUE TO NO MATERIAL.
TO ACHIEVE ZERO DEFECT IN COMPONENTS.
TO MINIMISE COST LOSS.
BETTER UTILIZATION OF SAP SYSTEM.

ACTIVITIES

GENERATION OF PURCHASE ORDER.
SCHEDULE TO THE SUPPLIERS.
ROAD PERMIT TO THE SUPPLIERS.
ARRANGEMENT OF MATERIALS AS PER REQUIREMENT.
MONITORING OF SUPPLIERS.
CAPACITY INCREASE AT SUPPLIER END / ADDITIONAL SOURCE
COST REDUCTION THROUGH NEGOTIATION / ALTERNATE SOURCE .
LOCALIZATION OF SUPPLIERS / COMPONENTS.
OBSERVATION

TIME LOSS DUE TO DELAY IN PURCHASE ORDER GENERATION.
HIGH TRANSPORTATION COST LOSS.
COMMUNICATION LOSS (DELAY IN SCHEDULE TO SUPPLIER).
REWORK DUE TO VENDOR DEFECTIVE PARTS.

PURCHAS
E
STORES ACCOUNTS I.T HR
Procurement
of material

Material
storage &
issue

Book
keeping, Bills
& Payments

Networking,
computers &
Transaction in SAP

Personnel &
Administratio
n

28

FINANCE DEPARTMENT

OBJECTIVE OF FINANCE DEPARTMENT
NO DELAY IN SUPPLIERS PAYMENT.
CHEQUE PREPARATION ON TIME.
BETTER UTILIZATION OF SAP SYSTEM.
BOOK KEEPING.
PROTECTING THE PROPERTY OF BUSINESS.
COMPLIANCE WITH LEGEL REQUIRMENT.
TO GENERATE RIGHT INFORMATION THIS IS HELPFULL TO VARIOUS PERSONS IN
PLANNING AND DECISION MAKING.
TO ASCERTAIN WHEATHER THE BUSSINESS OPERATION IS PROFITABLE OR NOT.
ACTIVITIES OF FINANCE DEPARTMENT
VERIFICATION AND BOOKING OF INVOICES.
HANDLING DIRECT AND INDIRET TAXES.
CALCULATION OF VARIANCE (BUDGET V/S ACTUAL).
MONTHLY M.I.S (MANAGEMENT INFORMATION SYSTEM).
PAYMENT TO INTERNAL AND EXTERNAL CUSTOMERS.
CLOSING OF ACCOUNTS & PREPARATION OF FINAL ACCOUNTS.

OBSERVATION

MISTAKES IN PREPARATION OF MANUAL CHAQUES.
MISTAKES IN ENTERING INVOICE IN SAP.
SELF AUDIT EVERY MONTH.

STRATEGY ADOPTED BY FINANCE DEPARTMENT

SKILLED EMPLOYEE.
SELF AUDIT EVERY MONTH.

29

I.T DEPARTMENT
ACTIVITY FLOW
SUPPLIER OWN DEPTT CUSTOMER

OBJECTIVE OF IT DEPARTMENT

NO NETWORK FAILURE.
NO COMPUTER BREAKS DOWN.
TO MINIMISE ERROR IN DATA PUNCHING IN SAP.
TO GIVE TRAINING TO USER.
BETTER UTILIZATION OF RESOURCES.

ACTIVITIES

MANAGING NETWORK LINK BETWEEN CENTRAL SERVER AT AURANGABAD TO
VARROC PANTNAGAR PLANT.
MANAGING LOCAL AREA NETWORK TO CONNECT 6 SHEDS.
ENSURE SMOOTH FUNCTIONING OF 78 COMPUTERS AND 20 PRINTERS.
SUPPORT 58 SAP USERS FOR DATA PUNCHING.
UPLOAD MASTER DATA IN SAP SYSTEM.
SUPPORT MANAGEMENT INFORMATION SYSTEM.
TRAINING AND UPGRADING SKILLS FOR COMPUTER USERS.

SERVICE
PROVIDER
DATA CENTER
IT
DEPARTMENT
ALL
DEPARTMENTS
30

STORE DEPARTMENT

ACTIVITY FLOW

SUPPLIER OWN DEPARTMENT CUSTOMER

OBJECTIVE OF STORE
NO PRODUCTION LOSS IN SEARCH OF MATERIAL
ON TIME SERVICE TO PRODUCTION DEPTT.
TO REDUCE MAN POWER COST.
BETTER UTILIZATION OF STORE SPACE.

ACTIVITIES OF STORE

GENERATION OF GRN.
MATERIAL UNLOADING, PHYSICAL VERIFICATION AND STORAGE.
MATERIAL ISSUE TO PRODUCTION.
REJECTION MATERIAL RETURNS TO VENDOR.
INTERPLANT PROCUREMENT.
MAINTAIN STORE INVENTORY.
MONITOR NON-MOVING/SLOW MOVING MATERIALS.
LOGISTICS PLANNING.

VENDOR STORE
PRODUCTION
DEPARTMENT
31

HR DEPARTMENT

ACTIVITY FLOW
SUPPLIER OWN DEPTT CUSTOMER

OBJECTIVE OF HR DEPARTMENT
SMOOTH RUNNING OF PLANT WITH SUPPORT OF EMPLOYEES.
TIMELY PAY-ROLL PROCESSING.
ADHERENCE OF GOVERNMENT RULES AND REGULATIONS.
EMPLOYEE MOTIVATION.
ACTIVITIES
PREPARATION OF JOB DESCRIPTION.
SELECTION AND RECRUITMENT.
TRANSFER AND PROMOTION.
IDENTIFICATION OF TRAINING NEEDS.
ANNUAL APPRAISAL.
CANTEEN MANAGEMENT.
SECURITY ARRANGEMENT.
HOUSE KEEPING.

GOVERNMENT
AUTHORTIES
AUTHORITIES

HR
ALL EMPLOYEES
32

MAIN COMPETITOR

As VEPL-PN mainly supplies their products to Bajaj Pantnagar plant and there is strong relationship
between Bajaj and Varroc group so there is as such no main competitor. But some competitors are:
Roop Polymer Ltd,
Classic Stripes,
V.M. Auto Industries,
Bharat Electronics And
Lumax.

SOURCES OF FINANCING

Sale.
Term loan form Bank.
Internal accruals (sale from other plant).

FUTURE PLANS

Within two years turnover should be 1000 crore.
Expand the business into international market within 5 years.

33

PROMOTERS OF THE COMPANY

The company is a joint venture between Varroc and Mr P J Swamy with the governing body comprising of

Mr Naresh Chandra Jain,
Chairman
B.A. [Economics], M.A.
[History],
D.B.A. [Birmingham, U.K.]
Mr Tarang Jain,
Vice Chairman
MBA(IMD, Switzerland)
Mr P J Swamy,
Managing Director

Mr Naresh Chandra Jain is the
founder of Varroc Group and
Chairman of Varroc Group and
Endurance Group of companies in
addition to being on the board of
several reputed Companies.

Mr Tarang Jain is the driving and
leading force of Varroc group of
companies.

Under his leadership the Varroc
group has grown 10 times from a
$24million company in 2000 to
$240 million in 2009.
In addition to being the Managing
Director of Varroc Group of
Companies,
Mr Tarang Jain is also Chairman
of
IMES, Poland,
Managing Director of
Durovalves India Pvt. Ltd.
Vice Chairman of Plastic
OmniumVarroc Pvt. Ltd.
and
President of IMES , Italy

Mr P J Swamy is a technocrat
entrepreneur with over thirty
years of technical and managerial
experience.
He has been closely associated
with almost every auto company
in India as well as international
companies like General Motors,
Toyota, Honda for Compound
Development, Product
Development And Technical
Service.
Mr Swamy was a member of
technical committee formed in
2000 by Govt of India to upgrade
the quality of automotive rubber
products in India

34

SWOT ANALYSIS OF VEPL-PN

Manufacturing Excellence in all business
vertical
Ability to develop products as per
customer requirements
Land Available for future Expansion Plan
Strategic Supplier of Bajaj group
STRENGTHS
More Dependability on Mother plants
Existing Supplier base facilities in an
Abad & Pune region leads to high
transport cost
Nil R & D Facilities
Main customer is Bajaj.
WEAKNESSES
Manpower Talent scarcity at associate
level, being local OEMs are hiring them
on comparatively higher cost.

THREATS
Potential Business Available with
Automotive OEMs
OEMs preferred choices are local
supplier base
No Major competition in the region.
Export (international market
OPPORTUNITIES
35

Working Capital Management is concerned with the problems that arise in attempting
to manage the current assets, current liabilities, and the relationship that exists
between them.

The term current assets refer to those assets which in ordinary course of business can be, or will be,
converted into cash within one year without undergoing a diminution in value and without disrupting the
operations of the firm. The major current assets are cash, marketable securities, account receivables and
inventory.

Current liabilities are those liabilities which are intended, at their inception to be paid in the ordinary course
of business, within one year out of the current assets or earnings of the concerned. The basic current
liabilities are Account Payables, Bills Payable, Bank Overdraft, and outstanding expenses.

The goal of working capital management is to manage the firms current assets and current liabilities in such
a manner that a satisfactory level of working capital is maintained.

The management of working capital plays an important role in maintaining the financial health of the firm
during the normal course of business. The firm starts functioning with the investment in fixed assets and
starts operation with the own funds or long term debts at its initial stage, but remains in function with the
help of optimum and efficient management of current assets and liabilities. Thus we reveal that not only
fixed assets management is important but also the working capital management is crucial for the firm to
maintain its existence, profitability and liquidity.

Chapter 3 Working Capital Management

36

CONCEPTS OF WORKING CAPITAL

Gross Working Capital- Refers to the firms investment in current assets.
Net Working Capital- Refers to the difference between current assets and current liabilities.

Both concepts are equally significant from the management view point.

Focusing on management of current assets

The gross working capital concept focuses on two aspects of current assets management.

1. How to optimize investment in current assets.
2. How current assets should be financed.

The level of investment in current assets should avoid excess or inadequate investment in current assets.

Excessive investment impairs firms profitability as funds remain idle.

Inadequate investment hampers solvency of the firm.

The gross working capital points its importance for a finance manager to know how he can finance the
current requirements at lowest possible cost but also to look for the most profitable investment avenue for
the surplus fund as the arise in short term.

Net working capital concept focusing on liquidity management

Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the
extent to which working capital needs may be financed by permanent sources of funds. It covers the
judicious mix of the long term and short term funds for financing .

Current assets. Excessive liquidity is also bad as it indicates mismanagement of current assets and less
profitability for the firm.

37

The working capital could be permanent and fluctuating or variable.
Permanent working capital is fixed or minimum level of current assets.
The Fluctuating Working Capital varies with the demand i.e. production and sales.

Temporary or fluctuating
Time
Permanent capital

A
m
o
u
n
t

o
f

w
o
r
k
i
n
g

c
a
p
i
t
a
l

(
R
s
.
)

38

PERMANENT AND TEMPORARY WORKING CAPITAL

The permanent working capital can also follow an increasing trend during expansion needs.

PERMANENT AND TEMPORARY WORKING CAPITAL DURING EXPANSION
PROCESS

Negative Working Capital emerges when current liabilities exceed current assets. Such a situation is
practical, when a firm depends on the bank loans for its operational expenses and occurs when a firm is
nearing a crisis of some magnitude.

Temporary or fluctuating

A
m
o
u
n
t

o
f

w
o
r
k
i
n
g

c
a
p
i
t
a
l

(
R
s
.
)

Permanent capital

39

ESTIMATION OF WORKING CAPITAL

The need for working capital to run the day to day business activities cannot be over- emphasized. We will
hardly find a business firm which does not require any amount of working capital.

We know that a firm should aim at maximizing the wealth of its shareholders. In its endeavor to do so, a
firm should earn sufficient return from its operations. Earning a steady amount of profit requires successful
sales activity. The firm has to invest enough funds in current assets for generating sales. Current assets are
needed because sales do not convert into cash instantaneously. There is an operating cycle involved in the
conversion of sales into cash.

The most appropriate method of calculating the working capital needs of a firm is the concept of
operating cycle.

The operating cycle is defined as the time duration required to convert raw materials or resources to
inventory, inventories to sales or accounts receivables and from accounts receivables to cash. The operating
cycle of a manufacturing company involves three phases:

Acquisition of raw materials
Manufacture of the product
Sale of the product

These phases are not synchronized because cash outflows usually occur before cash inflows.
Thus to estimate the investment required to be done in the three phases has to be analyzed, which is
done depending on the time and resources required for company to complete one operating cycle. The
operating cycle starts with the raw material conversion period and ends at the creditors conversion period.
As the firm makes adequate investment in the inventories and debtors for the smooth and
uninterrupted production for which the estimation of the length of the operating cycle is
determined.

40

The length of the operating cycle is determined by the following formulas:

Length of the operating cycle = inventory conversion period + debtors conversion period

The inventory conversion period is the total time needed for producing and selling the product. Typically it
includes the:

Raw material conversion period= Raw material *365
Raw material consumption

The raw material conversion period is the average time period taken to convert material into work in
progress

Work in progress conversion period= Work-in-progress inventory *365
Cost of Production
Work in progress conversion period is the average time period required to complete the semi-finished goods
or work in progress.

Finished goods conversion period= Finished goods inventory *365
Cost of goods Sold
Finished goods conversion period is the average time taken to sell the finished goods.

Gross operating cycle= ICP + DCP

Gross Operating Cycle is the total time required for the production and sales of the finished goods including
the time of the credit sales.

Debtors conversion period = Debtors *365
Credit Sales

Debtors conversion period is the average time taken to convert debtors into cash.

41

Creditors conversion period= Creditors *365
Credit Purchases
Creditors conversion period is the average time taken by the firm in paying its suppliers .

Net operating cycle= Gross operating cycle Creditors conversion Period
If depreciation is excluded from the expenses in the computation of the operating cycle,

42

OPERATING CYCLE ANALYSIS OF MAJOR PLAYERS OF
VARROC ENG. AND ITS COMPETITORS

VARROC ENGINEERING PVT. LTD.
ITEMS 2010-11 2009-10 2008-09
Rs (Cr.) conversion period(Days) Rs (Cr.)
conversion
period(Days) Rs (Cr.)
conversion
period(Days)
Raw Materials 166.81 30.62 160.06 30.51 145.83 37.32
Work In Progress 32.44 5.03 19.15 3.07 20.42 4.32
Finished Goods 303.6 40.21 189.38 26.11 77.78 13.67
Receivables 435.52 56.45 477.89 66.85 411.79 72.29
Sundry Creditors 592.65 107.45 553.67 104.07 468.63 117.73

DELFE AUTOMOBILES
BASIS 2010-11 2009-10 2008-09
Raw Material Consumption 1988.7 1914.89 1426.12
Cost of Production 2354.86 2278.98 1727.24
Cost of sales 2755.96 2647.84 2076.52
Sales 2816.16 2609.21 2079.08
Credit purchases 2013.1 1941.93 1452.88
ITEMS 2010-11 2009-10 2008-09
Rs (Cr.)
conversion
conversion
conversion
period(Days)
Raw Materials 266.79 31.32 216.21 29.54 193.09 32.43
Work In Progress 93.15 8.97 85.47 9.53 78.06 10.63
Finished Goods 333.48 29.54 263.95 26.48 282.41 34.91
Receivables 551.92 45.72 539.36 52.86 462.34 57.21
43

BASIS 2010-11 2009-10 2008-09
Cost of sales 4120.52 3638.6 2952.7
Sales 4406.5 3724.2 2949.85

METALMEN MICRO TUNER

ITEMS 2010-11 2009-10 2008-09
Rs (Cr.)
conversion
conversion
conversion
period(Days)
Raw Materials 212.47 33.86 219.34 42.70 218.79 54.97
Work In Progress 27.05 3.65 29.41 4.80 23.35 4.55
Finished Goods 212.44 25.10 170.66 24.40 87.98 15.16
Receivables 208.30 23.09 175.14 24.35 156.52 25.67

BASIS 2010-11 2009-10 2008-09
Cost of sales 3088.75 2552.52 2117.6
Sales 3292.32 2625.52 2225.49

44

LUMAX LTD.
ITEMS 2010-11 2009-10 2008-09
Rs (Cr.)
conversion
conversion
conversion
period(Days)
Raw Materials 118.33 29.73 84.5 25.31 94.61 33.92
Work In Progress 22.25 4.69 22.25 5.45 22.40 6.46
Finished Goods 80.80 14.46 80.04 16.94 52.48 12.72
Receivables 263.17 45.00 253.23 52.89 236.60 56.52

BASIS 2010-11 2009-10 2008-09
Cost of sales 2040.24 1724.31 1506.19
Sales 2134.78 1747.43 1527.99

NOTE: Raw material stock includes stores and spares stock raw material consumption includes stores and
spares consumption. Credit purchases include raw material, finished goods and stores and spares.

45

SUMMARY
VARROC ENGINEERING LTD

VARROC ENGINEERING LTD
ITEMS 2010-11 2009-10 2008-09
conversion period(Days)
Raw Materials 30.62 30.51 37.32
Work In Progress 5.03 3.07 4.32
Finished Goods 40.21 26.11 13.67
Receivables 56.45 66.85 72.29
Gross operating cycle 132.31 126.54 127.6
Sundry Creditors 107.45 104.07 117.73
Net operating cycle 24.86 22.47 9.87

ITEMS DELFE AUTOMOBILES METALMEN MICRO TUNER LUMAX Limited

2010-
11
2009-
10
2008-
09 2010-11 2009-10 2008-09
2010-
11
2009-
10
2008-
09
conversion period(Days) conversion period(Days) conversion period(Days)
Raw Materials 31.32 29.54 32.43 33.86 42.7 54.97 29.73 25.39 33.92
Work In Progress 8.97 9.53 10.63 3.65 4.8 4.55 4.69 5.45 6.46
Finished Goods 29.54 26.48 34.91 25.1 24.4 15.16 14.46 16.94 12.72
Receivables 45.72 52.86 57.21 23.09 24.35 25.67 45 52.89 56.52
Gross operating cycle 115.55 118.41 135.18 85.7 96.25 100.35 93.88 75.28 109.62
Sundry Creditors 54.49 57.11 52.94 80.29 76.19 88.32 106.28 121.77 146.34
Net operating cycle 61.06 61.3 82.24 5.41 20.06 12.03 -12.4 -46.49 -36.72
46

OPERATING CYCLE ANALYSIS OF FOUR MAJOR PLAYERS

Raw material conversion period is used to measure the average time taken by raw materials to be used in the
process of production. It indicates how efficiently money is used in raw materials that on one hand should be
sufficient to continue the production and on the other, excess funds must not be blocked in the form of raw
materials. Table shows that raw material conversion period is a bit high in all years & it should be reduced
to get better utilization of funds.

WorkinProgress conversion period reflects the efficiency of the production department which shows the
time taken by the company to process the product. This period has though, increased as compared to the
previous years in 2007 but it still have lot of potential of improvement. According to the table DELFE
Automobiles is the most efficient as far as its operational efficiency is concerned.
Finished goods conversion period indicates how much average time is taken by the finished goods to be
converted into sales. As compared to the previous years it has shown drastic increase as compared to its
competitors which means that the company is not able to sell its products in small period.
The Average Collection Period (ACP) is another litmus test for the quality of the receivables business,
giving the average length of the collection period. As a rule, outstanding receivables should not exceed
credit terms by 1015 days. Though the ACP has reduced from 72 rays to 56 days in the previous years but
still has a room for improvement. On the other hand of DELFE is 45 days and that of METALMEN MICRO
TUNER is 23 days which is the reason of their profitability and less dependency on outsiders funds.
The creditors conversion period indicates the time the company takes to pay its suppliers; it represents the
trade credit limit. The higher CCP as compared to DCP it would be profitable as it also shows the
creditability of the company.

VARROC has maximum credibility to its competitors.

The interpretation of operating cycle analysis is that the GOC should be higher enough than CCP so as to
decrease interest cost and increase profitability.

The gross operating cycle has increased due to increase in the FGCP and RMCP. In case of DELFE
AUTOMOBILES the GOC is decreasing due to decrease in their DCP and quick and high sales turnover.
47

The net operating cycle of VARROC is showing an increasing trend which is a good sign. The reason
behind it is decrease in the DCP and increase in the CCP. On the other hand DELFE is showing the
decreasing trend as it pays its creditors early as compared to others for other cost benefits through the
suppliers.

Creditors and Debtors conversion periods comparative analysis indicates the trade credit utilisation capacity
which further facilitates the firm to borrow less from outside resources for operating expenses. This all
shows positive change in the position of VARROC.

48

DETERMINANTS OF WORKING CAPITAL

Nature of business
Market and demand conditions
Technology and manufacturing policy
Credit policy
Operational efficiency
Price level changes

The growth of the firm is directly based on the working capital management especially in
manufacturing and financial companies. As the output increases the current assets also
increases but at a decreasing rate, if are employed efficiently. The current assets constitute
about 60% of the total assets in case of large and medium public limited companies in India.
The large company like BHEL invests 90% of its capital in current assets. Thus for their
profitability the efficiency of working capital management is very important.

The level of current assets can be measured by relating current assets to
fixed assets.

49

CA/FA RATIO OF VARROC & ITS PEERS

YEAR

VARROC

DELFE
AUTOMOBILES

METALMEN
MICROTUNER

LUMAX
2008-09

0.66 1.70 0.89 1.77
2009-10

0.81 1.87 1.10 0.74
2010-11

0.90 1.73 1.00 0.82

A higher CA/FA ratio means conservative current assets policy and hence greater liquidity and lower risk.
A lower CA/FA ratio indicates aggressive current assets policy, and hence higher risk and poor liquidity.
Varroc has improved on its CA/FA ratio since three years which indicates higher liquidity and lower risk.
The comparative analysis shows that MRF has highest liquidity as compared to others i.e. it pays its
creditors early than its competitors. The ratio also indicates the level of creditors and investors trust in the
company.

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2008-09 2009-10 2010-11
Varroc
Delfe Automobiles
Metalmen Microtuner
Lumax
50

WORKING CAPITAL REQUIREMENT
The working capital requirement for a firm has to be decided keeping in mind the consequences of the
working capital being above or below the optimum requirement of the firm.
If you have insufficient working capital and try to increase sales, you can easily overstretch the financial
resources of the business. This is called overtrading.
CONSEQUENCES OF THE INADEQUATE WORKING CAPITAL
When working It stagnates growth. It becomes difficult for the firm to undertake profitable
projects for non-availability of working capital funds.
It becomes difficult to implement operating plans and achieve the firms profit target
Operating inefficiencies creep in when it becomes difficult even to meet day to day
commitments.
Fixed assets are not efficiently utilised for the lack of working capital funds. Thus the firms
profitability would deteriorate.
Paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc.
The firm loses its reputation when it is not in a position to honour its short term obligations.
As a result the firm faces tight credit terms.

Capital is inadequate; a company faces the following problems:

CONSEQUENCES OF THE EXCESSIVE WORKING CAPITAL

Too much working is as dangerous as too little of it. Excessive working capital raises the following
problems-
A company may be tempted to under trade and lose heavily.
A company may keep very big inventories and tie up funds unnecessarily.
There may be an imbalance between liquidity and profitability.
It is an indication of defective credit policy and slack collection period.
51

High liquidity may include a company to undertake greater production, which may not have a
matching demand. It may find itself in an embarrassing position unless its marketing policies
are properly adjusted to boost up the market for its goods.
Tendencies of accumulating inventories tend to make speculative profits grow. This may tend
to make the dividend policy liberal and difficult to cope with in future when the firm unable
to make speculative profits.
A company may invest heavily in its fixed equipment which may not be justified by actual
sales or production. This may provide a fertile ground for later overcapitalization.
A determination of the adequacy of working capital poses a problem both to the corporate
body and the banking sector.

Sound financial and statistical techniques, supported by judgement, should be used to predict the quantum of
working capital need at different time periods.

A firms net working capital position is not only important as an index of liquidity but is also used as a
measure of firms risk. All other things being equal, the more the net working capital a firm has the less
likely that it will default in meeting its current financial obligations. Lenders such as commercial banks
insist that the firm should maintain a minimum net working capital position.

52

CONTROL OF WORKING CAPITAL

In case of fixed assets, preliminary studies are made as to its profitability and the item is cleared technically
and financially. Once the purchase is made, the investment is completed and nothing can be done with it
thereafter. In case of investment in working capital, the

Control will have to be stringent and continuous if any semblance of economy is to be achieved in the
investment of working capital.

The control of working capital requires constant vigilance on the part of many executives in different
departments like stores, purchase, production and finance. In practice, the working capital investment which
in the beginning of the project is taken as 3 or 4 (25% to 33%) months of production expenditure would
eventually reach 6070 percent of the total investment of the company, if proper control is not exercised.

53

WORKING CAPITAL ANALYSIS
VARROC ENGINEERING PVT.LTD.

SNO. ITEMS

2010-11 2009-10 2008-09 BASIS

Rs (Cr.) Days Rs (Cr.) Days Rs (Cr.) Days
CURRENT ASSETS
1. INVENTORY:
Raw Materials 153.2 28.57 143.04 27.7 129.95 33.93 RMC
Work In Progress 32.44 5.03 19.15 3.06 20.42 4.31 CoP
Stores and Spares 13.61 156.46 17.02 208.12 15.88 207.08 S & S
Finished Goods 303.6 41.74 189.38 27.11 77.78 14.29 CoS
Total Inventories 502.85 69.14 368.59 52.76 244.03 44.84 CoS
2. Receivables 435.52 56.44 477.89 66.85 411.79 72.29 Sales
3. Other Current Assets 29.47 3.82 39.5 5.53 36.49 6.41 Sales
4. Total Current Assets 967.84 125.44 885.98 123.94 692.31 121.54 Sales

CURRENT LI ABI LI TI ES
1. Sundry Creditors 592.65 107.45 553.67 104.06 468.63 117.73 Cr. prchs
2. Other Liabilities 207.43 38.99 206.52 51.88 170.78 42.9 Cr. prchs
3. Total Liabilities 800.05 103.69 766.34 107.2 675.13 118.52 Sales

Net Working Capital 167.79 119.64 17.18

Less: Bank Borrowings 122.65 139.73 82.94

Own Margin of Company 45.14 -20.09 -65.76

54

Year 2010-11 2009-10 2008-09
CURRENT RATI O 1.32 1.27 1.16
QUI CK RATI O 0.69 0.8 0.8
ACTI VI TY RATI O
I nventory Turnover Ratio 5.5 7.18 8.5
Debtors Turnover Ratio 6.47 5.46 5.05
OPERATI NG PROFI T RATI O 0.06 0.03 0.02

55

DELFE AUTOMOBILES

SNO.
ITEMS

2010-11 2009-10 2008-09 BASIS

CURRENT ASSETS
1. INVENTORY:

CURRENT
LI ABI LI TI ES

1. Sundry Creditors 483.01 54.48 433.46 57.11 316.07 52.93 Cr. prchs
2. Other Liabilities 1.72 0.19 2.43 0.32 4.51 0.75 Cr. prchs


Less: Bank
Borrowings
104.87 110.95 109.02

Own Margin of
Company
728.83 611.47 632.59

56

year 2010-11 2009-10 2008-09
QUI CK RATI O 1.24 1.38 1.5
ACTI VI TY RATI O

57

METAL MEN MICRO TUNER

SNO. ITEMS 2010-11 2009-10 2008-2009 BASIS

Rs
(Cr.)
Days Rs (Cr.) Days Rs (Cr.) Days
CURRENT ASSETS
1. INVENTORY:

CURRENT LI ABI LI TI ES
1. Sundry Creditors 521.14 80.28 406.54 76.18 371.26 88.31 Cr. Prchs
2. Other Liabilities 21.07 3.25 9.18 1.72 8.88 2.11 Cr. Prchs

Less: Bank Borrowings 144.94 299.00 45.06
Own Margin of Company 159.03 111.4 171.87
58

Year 2010-11 2009-10 2008-09
QUI CK RATI O 0.94 1.27 0.92
ACTI VI TY RATI O

59

LUMAX

SNO.
ITEMS

2010-11 2009-10 2008-09 BASIS


CURRENT
ASSETS

1 INVENTORY:
2 Receivables 263.17 44.99 253.23 52.89 236.60 56.52 Sales
3
Other Current
Assets
40.55 6.93 39.61 8.27 31.23 7.46 Sales
4 Total Current Assets 524.94 80.14 476.29 89.06 436.04 89.39 Sales

CURRENT
LI ABI LI TI ES

1 Sundry Creditors 435.53 106.28 415.87 121.76 425.20 146.20 Cr. Prchs
2 Other Liabilities 54.12 13.21 158.08 46.28 131.07 45.05 Cr. Prchs
3 Total Liabilities 489.65 74.76 573.95 107.32 556.21 114.04 Sales

Net Working
Capital
35.29 -97.66 -120.17

60

Year 2010-11 2009-10 2008-09
CURRENT RATIO 1.1 0.88 1.59
QUICK RATIO 0.68 0.57 1.3
ACTIVITY RATIO
Inventory Turnover Ratio 9.22 9.3 8.95
OPERATING PROFIT RATIO 0.06 0.03 0.04

Working Capital Analysis

The gradual increase in the net working capital of Varroc indicates increased profits. It is soon going to
approach Delfe Automobiles.

-200
-100
0
100
200
300
400
500
600
700
800
900
2008-09 2009-10 2010-11
Varroc
Delfe Automobiles
Metal Men Microtuner
LUMAX
61

Current Ratio

The current ratio is a measure of the firms short term solvency. As per conventional rule a 2 to 1 ratio is
considered satisfactory. The liquidity of Varroc is on the verge of improvement as compared to other players

Year

VARROC
DELFE
AUTOMOBILES
METALMEN
MICROTUNER

LUMAX
2008-09 1.16 2.83 1.81 1.59
2009-10 1.27 2.39 2.29 .88
2010-11 1.32 2.23 1.73 1.1

0
0.5
1
1.5
2
2.5
3
2008-09 2009-10 2010-11
Varroc
Delfe Automobiles
Metalmen Microtuner
Lumax
62

Quick Ratio

The quick ratio signifies the immediate conversion potential of the assets of the company. The trend
followed in the industry is responsible for the decreasing trend in the acid test ratio due to the increasing raw
material prices impact follows the situation of cash crunch, the most liquid asset.

Year

Varroc

Delfe
Automobiles

Metalmen
Microtuner

Lumax
2008-09

.8 1.5 .92 1.3
2009-10

.8 1.38 1.27 .57
2010-11

.69 1.24 .94 .68

0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2008-09 2009-10 2010-11
Varroc
Delfe Automobiles
Metalmen Microtuner
Lumax
63

Inventory Turnover Ratio

The inventory turnover ratio signifies how efficiently the raw material is converted into goods and cash
thereafter. The higher the turnover ratio the lesser time is required to turn the inventory into sales. Varroc is
showing a decreasing trend in the ITR this is due to the increase in the Finished Goods Conversion Period or
the slow sales.

YEAR

VARROC
DELFE
AUTOMOBILES
Metalmen
Microtuner

Lumax
2008-09

8.5

4.84

6.83

8.95
2009-10

7.18

6.43

6.08

9.3
2010-11

5.5

5.94

6.41

9.22

0
1
2
3
4
5
6
7
8
9
10
2008-09 2009-10 2010-11
Varroc
Delfe Automobiles
Metalmen Microtuner
Lumax
64

Debtors Turnover Ratio

Debtors conversion period has considerably come down with the increase in the ratio of debtors turnover.
Delfe Automobiles has achieved maximum DTR as compared to its peers.

Year

Varroc
Delfe
Automobiles
Metalmen
Microtuner

Lumax
2008-09 5.05 6.3 14.21 9.08
2009-10 5.46 6.9 14.9 6.9
2010-11 6.47 7.98 15.8 8.1

0
2
4
6
8
10
12
14
16
2010-11 2009-10 2010-11
Varroc
Delfe Automobiles
Metalmen MicroTuner
Lumax
65

NET SALES

Year

Varroc
Delfe
Automobiles
Metalmen
Microtuner

Lumax
2008-09 2079.08 2949.85 2225.49 1527.99
2009-10 2609.21 3724.2 2625.52 1747.43
2010-11 2816.16 4406.55 3292.32 2134.78

0
500
1000
1500
2000
2500
3000
3500
4000
4500
2008-09 2009-10 2010-11
Varroc
Delfe Automobiles
Metalmen Microtuner
Lumax
66

CASH MANAGEMENT

Cash is the lifeblood of business firms as it is needed to acquire assets and to pay obligations of the firm.
Apart from the fact that cash is the most liquid current asset, it is the ultimate output that is expected to be
realised from all company operations, because all major current assets i.e. Inventory and Receivables get
eventually converted into cash.

In narrower sense, cash covers currency and generally accepted equivalents of cash, such as cheques, drafts
and demand deposits in banks. The broader view of cash also includes near cash assets, such as marketable
securities and time deposits in banks that can readily sold and converted into cash. Irrespective of the form
in which it is held, a distinguishing feature of cash, as an asset, is that it has no earning power.

OBJECTIVES OF CASH MANAGEMENT
The basic objectives of cash management are to meet the cash disbursement needs (payment schedule) and
to minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task
of cash management is to reconcile them.

FACTS OF CASH MANAGEMENT

Cash management is concerned with the managing of:

Cash flows into and out of the firm,
Cash flows within the firm, and
Cash balances held by the firm at a point of time by financing deficit or investing surplus
cash.
It can be represented by a cash management cycle. Sales generate cash which has to be
disbursed out. Cash management seeks to accomplish this cycle at a minimum cost and to
achieve liquidity and control at same time. Cash is least productive asset that a firm holds but
it is significant because it is use to pay the firms obligations. Therefore, the aim of the cash
management is to maintain adequate control over cash position to keep firm sufficiently

67

Cash management is also important in terms of:
Synchronizations of cash flows
Short cost
Excess cash balance costs
Procurement and management

MOTIVES FOR MAINTAINING CASH BALANCE

There are four primary motives for maintaining cash balances;
Transaction motive: To meet routine cash requirement or for anticipation of obligations.
Precautionary motive: Reserve for random and unforeseen fluctuations in cash flows. It is held
in the form of marketable securities.
Speculative motive: Refers to firm to take advantage of opportunities which are typically out of
the normal course of business.
Compensating motive: To compensate banks for providing services and loans.

CASH MANAGEMENT STRATEGIES

In order to resolve the uncertainty about cash flow prediction and because of lack of synchronization of cash
inflows and outflows firm should have appropriate strategies for managing cash. The strategies should be
regarding these four steps of cash management.

CASH PLANNING
DETERMINING OPTIMUM CASH LEVEL
MANAGING CASH FLOWS
INVESTING SURPLUS CASH

This ideal cash management system will depend on the firms product, organization structure, competition,
culture and option available. The task is complex and decision taken can affect important areas of the firm.
For example, to improve collections if the credit period is reduced, it may affect sales.
68

CASH PLANNING

Firm needs cash for investing in inventory, receivables, fixed asset and to make payments in operating
expenses in order to maintain growth in sales and earnings. Cash planning is technique to plan and control
the use of cash, helps to anticipate future cash flows and needs of firm, reduces the possibility of cash
surplus and cash deficit. The period and frequency of cash planning generally depends upon the size of the
firm and philosophy of management.

Cash budget is a tool for the application of this technique. It is the most significant device to plan for and
control cash receipts and payments. It states the cash position of a firm as it moves from one budgeting sub
period to another. It gives information on the timing and magnitude of expected cash flows and cash
balances over the projected period.

The time horizon of a cash budget may differ from firm to firm. A firm whose business is affected by
seasonal variations may prepare monthly cash budgets. Daily or weekly cash budgets should be prepared for
determining cash requirements if cash flows show extreme fluctuations. Cash budget for a longer intervals
may be prepared if cash flows are relatively stable.

Cash forecasts are needed to prepare cash budgets. It can be done on short or long term basis. Forecasts
covering periods of one year or less are considered short-term; those extending beyond one year are
considered long-term.

SHORT-TERM CASH FORECASTS: The important functions of short-term cash
forecasts are:
To determine operating cash requirements.
To anticipate short-term financing.

69

MANAGING CASH FLOWS

Once the cash budget has been prepared and appropriate net cash flow has established,

Management should focus that there is no significant deviation in actual and budgeted cash flow. To achieve
this cash management efficiency proper control over cash collection and disbursement system.
In broader sense, cash management strategies are related to cash turnover process i.e. cash cycle with cash
turnover together constitutes this process. Cash cycle refers to the process which includes following three
steps;

Conversion of Cash into inventories.
Conversion of Inventories into receivables.
Conversion of receivables into cash.

The Cash Conversion Cycle or Cash Cycle is an important analysis tool that allows the credit analyst to
determine more easily why and when the business needs more cash to operate, and when and how it will be
able to repay the cash. It is also used to distinguish between the customer's stated loan purpose and the
borrowing cause. Once the cash conversion cycle for the borrower is mapped, the analyst is able to judge
whether the purpose, repayment source and structure of the loan are the adequate ones.

70

The Cash Conversion Cycle represents the number of days it takes a company to purchase raw materials,
convert them into finished goods, sell the finished product to a customer and receive payment from the
customer / account debtor for the product. The CCC has three components (Accounts Receivable Turnover
Days, Inventory Turnover Days and Payables Turnover Days). At its simplest expression the asset
conversion cycle of a company is defined by the sum of the Accounts Receivable Turnover Days and the
Inventory Turnover Days subtracting the Accounts Payable Days.

First lets look at how these numbers are calculated:

1- Accounts Receivable Turnover in Days: Measures the average number of days from the sale of
goods to collection of resulting receivables. It is obtained by the following formula:

(Accounts Receivable / Sales X 365)

For example, A fictional manufacturer of widgets: "Firm X" with annual sales of Rs.5,000,000 and with
accounts receivable outstanding of Rs.500,000 at the end of the year is said to have a 36.5 Account
Receivable Turnover in days.

(Rs.500, 000 / Rs.5, 000,000) X 365 = 36.5 days

2- Inventory Turnover. It is measuring time on an average between acquisition and sale of
merchandise. For a manufacturer it covers the amount of time between purchase of raw material and sale of
the completed product. It is obtained by the following formula: (Inventory / COGS X 365).

Going back to our fictional manufacturer of widgets; "Firm X" let's suppose that the company had COGS of
Rs. 3,000,000 with inventory of Rs. 411,000 at the end of the year. It would be said that Red Widget Co. has
Inventory turnover days of 50.

(Rs. 411,000 / Rs. 3,000,000) X 365 = 50 days.

71

3- Payables Turnover in Days. It measures the average length of time between purchase of goods
and payment for them. It is obtained by the following formula: (Accounts Payable / COGS x 365).

This time "Firm X" has an accounts payable balance of Rs. 456,000 at the end of the year. The result is an
accounts payable days of 55.5

(Rs.456, 000 / Rs. 3,000,000) X 365 = 55.5 days

And Cash cycle = Avg. age of inventories+ A/c receivables- A/c payables

Therefore, In case of Firm X the Cash Conversion Cycle is 31 days. (36.5 + 50 - 55.5).
This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a
company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied
up in the business process, and thus the better for the company's bottom line.

Cash turnover means number of times cash is used during each year. Numerically,

Cash turnover = (Assumed no. of days in a year) /cash cycle

Objective of cash management strategies is to have minimum operating cash that can be achieved by higher
cash turnover, as frequent the cash turns, less is the requirement of cash in firm. So, firm should try to
maximize the cash turnover. The minimum level of operating cash is determined by dividing total operating
annual outlays by cash turnover rate.

72

CASH CYCLE OF VARROC & ITS COMPETITORS

Varroc Engineering Pvt. Ltd.
ITEMS 2010-11 2009-10 2008-09 BASIS
Raw Materials 166.31 30.61 160.06 30.5 145.83 37.32 Raw Material Consumption
Work In Progress 32.44 5.25 19.15 3.22 20.42 4.55 Cost of Production
Finished Goods 303.6 41.74 189.38 27.1 77.78 14.29 Cost of sales
Total Inventories 502.35 77.6 368.59 60.82 244.03 56.16 Cost of sales
Debtors 435.52 56.44 477.89 66.85 411.79 72.29 Sales
Creditors 592.65 107.45 553.67 104.06 468.63 117.73 R/M+ Purchase of FG+S&S Cons.
Cash cycle 345.22 26.59 292.81 23.61 187.19 10.72
Cash turnover 13.73 15.46 34.05
73

Delfe Automobiles
ITEMS 2010-11 2009-10 2008-09 BASIS
Rs
(Cr.)
Days Rs (Cr.) Days Rs (Cr.) Days
Debtors 551.92 45.72 539.36 52.86 462.34 51.2 Sales
Creditors 483.01 54.48 433.46 57.11 316.07 52.93 R/M+ Purchase of FG+S&S
Cons.
Cash cycle 762.25 62.59 671.53 62.82 699.83 78.04
Cash turnover 5.83 5.81 4.68
74

Metalmen Microtuner
ITEMS 2010-11 2009-10 2008-09 BASIS
Rs
(Cr.)
Days Rs
(Cr.)
Days Rs
(Cr.)
Days
Debtors 208.3 23.09 175.14 24.35 156.52 25.67 Sales
Creditors 521.14 80.28 406.54 76.78 371.26 88.31 R/M+ Purchase of FG+S&S Cons.
Cash cycle 139.12 6.23 188.01 20.48 115.38 12.81
Cash turnover 58.59 17.82 28.49
75

Lumax
ITEMS 2010-11 2009-10 2008-09 BASIS
Rs
(Cr.)
Days Rs
(Cr.)
Days Rs
(Cr.)
Days
Work In
Progress
22.25 4.72 22.25 6.66 22.40 8.02 Cost of Production
Debtors 263.17 44.99 253.23 52.89 236.60 56.52 Sales
Creditors 455.53 106.28 415.87 121.76 425.20 146.20 R/M+ Purchase of FG+S&S
Cons.
Cash cycle 29.02 -12.17 24.15 -19.74 -19.11 -34.83
Cash turnover -29.99 -18.49 -10.48
76

CASH CYCLE ANALYSIS

The above calculations of cash cycle also known as net operating cycle or asset turn over cycle and cash turn
over reveal the following points as follows:

The cash conversion cycle of Varroc is better than Delfe Automobiles and Lumax.
The cash conversion cycle of Varroc has increased from 11 days to 27 days since 2009 and
cash turnover has decreased from 34 times to 14 times. The reason behind this increased in
Cash Conversion Cycle (CCC) could be increase in the Finished Goods Conversion Period
(FGCP) which has increased from 14 days to 42 days.
The increase in FGCP indicates that the sale of finished goods is taking more time than its
competitors (Delfe Automobiles 30 days, Metalmen Microtuner 26 days).
The increase in FGCP is due to the demand for Automobiles has not much increased, and
Varroc has set up a new plant in Noida.
Varroc has good Creditors Conversion Period (CCP) of 107 days as compared to its peers
(Delfe Automobiles 54 days, Metalmen Microtuner 80 days) and is working on reducing
its Debtors Conversion Period (DCP) [from 72 days to 56 days]. By reducing DCP further its
cash cycle would improve.
The impact of decrease in DCP and increase in the CCP is subsided by the increase in the
FGCP.
The ideal cash cycle is of Metalmen Microtuner which has decreased from 13 days to 6 days.
Varroc is soon going to approach the same trend through its efficient operations.

77

PRACTICES AT VARROC AND INDUSTRIES FOLLOWED
REGARDING CASH MANAGEMENT

The objective of cash management processes of the Varroc Industries is to minimize the funds committed to
cash balance. As idle cash balance is non-earning asset and it will incur cost as company will have to
forgone its profit in terms of opportunity cost. At the same time firm has to meet its payment schedule to
foster good relations with its trade creditors and lead to strong credit rating which enables the company to
purchase goods on favorable terms.

PRACTISES: For its payment schedule Varroc have credit facility with different banks in form of Cash
Credit, Overdrafting, Foreign Bill Discounting, Export Packaging Credit and Letter of Credit.

CASH PLANNING

PRACTISES: At Varroc Budgeting process encompassing a detailed exercise in target setting,
continuous performance monitoring, course correction and result achievement.
Varroc have long range forecast of 10-12 years cash flow projections on monthly basis for the first year,
quarterly basis for the next two years and annually for the remaining years.
Varroc has full ERP implantation at all the offices and at plant level which speeds up the transfer of
information in turn increases work efficiency. The use of a computer-based model reduces the tedium of
carrying out numerous repetitive calculations and simplifies the alteration of assumptions and the
presentation of results. Computer model for short-term bank planning uses assumptions on sales, costs,
credit, funding etc. to produce monthly cash flow projections for up to a year ahead. The initial assumptions
can be readily altered to evaluate alternative scenarios. Though budget planning is easy due to ERP package
used in the company but continuous performance monitoring is done by the managers, monthly reports are
been made and are presented to company executives, to compare the deviation of actual figures from
budgeted one and find the reason behind them to minimize these deviations. Basically, assumptions are
based on sales therefore most of the time current market situation decides the deviation. Any abnormal
variations are reviewed thoroughly and immediately steps are taken.

78

MANAGING CASH FLOWS

SPEEDY COLLECTION OF RECEIVABLES

The speedy collection of receivables can conserve cash and reduce its requirement for cash balances in
future. In order to increase the efficiency of collections Varroc follows both approaches, the first is to lure
the customers by offering various cash discounts schemes and second one is early conversion of payments
into cash. The cash discounts schemes not only speed up in collection but also help in reducing the
probability of bad debts.

PRACTICES: Varroc offers 2/30 net 30 as standards discount rates to its traders, slab discount facility and
quantity turnover discount i.e. 20% discount on 3 times turn of goods in one quarter as per scheme . Under
CIS system the sales amount credited at the local regional offices through the local account of sales depot to
the main bank account of the company within 6 hrs. or half of the same day.

Varroc has 12 regional offices, under which there are 47 area offices, these, along with sales operation are
also responsible for the cash collection operation. The cash collection operations include collecting check
from different areas lying under the supervision of the same regional offices, after completing that cheque
(to be done at regional office). The processed cheque is then deposited into the local bank account of that
branch which is transferred into companys concentration banking account through this CIS system. The
processing is done in minimum time through ERP implantation and the report concerned (related to cheque)
is there after is send to head office in Delhi. The Lock box system facility is not use by Varroc as the main
clients are dealers and OEs to operate through concentration banking system. Lock box system is more
useful in case where customer base is geographically dispersed and cash collection is the main aim (For
example; lock box of telephone bills) where as through concentration banking the company not only
collects cash from various collection points located at sales depots but also performs sales and service
operation.

As per Varroc practices its accounts receivables reduced from 72 days to 55 days.

79

EFFICIENT INVENTORY PRODUCTION MANAGEMENT

The efficient management of cash flows could be done by reducing the production cycle and increasing raw
material and finished goods turnover. This would enhance the cash conversion in less time and the firm
would rely on the operating profits for operational expenses.

PRACTICES: Varroc continuously is working on reducing the Raw Material and Finished Goods
conversion periods. On the other hand it works on increasing the work in progress turnover. This
measure would reduce the production cycle and reducing debtors conversion period indicates efficient cash
conversion cycle.

80

EFFICIENT CASH MANAGEMENT THROUGH SAP IN
VARROC(VEPL-PN)

The cash management component allows the analysis of financial transactions for a given period. Cash
management also identifies and records future developments for the purpose of financial budgeting. In SAP
treasury cash management, the companys payment transactions are grouped into cash holdings, cash
inflows, and cash outflows.

It provides information on the sources and uses of funds to secure liquidity to meet payment obligations
when they become due.

It also monitors and controls incoming and outgoing payment flows, and supplies the data required for
managing short term money market investments and borrowings. Depending on the time period under
review, a distinction is made between cash position, short-term cash management and medium and long
term financial budgeting.

SAP cash management component does ensure that all information relevant to liquidity is available for
analysis purposes, creating a basis for the necessary cash management decision. In bank account
management, electronic banking and control functions provide support for managing and monitoring of bank
accounts besides the liquidity forecasts function integrates anticipated payment flows from financial
accounting, purchasing, and sales to create the liquidity outlook for the medium to long term
The cash position and liquidity forecasts components generally cover both foreign currency holdings and
expected foreign currency items.
Working capital management deals with the other two important aspects, namely, receivables management
and inventory management. For smooth production policy and efficient collection and credit policy, the
companys engrossed interest should be involved in receivables management. The hurdle less inventory
management is only possible through effective cash management.

81

INVENTORY MANAGEMENT

In India inventories are approximately 60 per cent of current assets in manufacturing companies. Inventory
management avoids unnecessary investment and contributes to long term profitability. Level of inventories
can be reduced to 10 20 %, without any adverse effect on production and sales of company, by using
simple inventory planning and control technique.

Inventory refers to stockpile of the products a firm is offering for sale and the components that make up the
final product. The various forms of inventory are;

Raw material basic inputs that are converted into finished product.
Work-in- progress semi manufactured goods.
Finished goods complete manufactured products ready for sale.
Supplies or stores and spares include material help indirectly in production process.

The level of all three kinds of inventories for a firm depends upon the nature of its business, production
cycle and turnover. A manufacturing firm will have substantially high levels of all three kinds of inventories,
while a retail or wholesale firm will have a very high level of stock of finished goods inventories and nil
stock of raw materials and work-in-progress.
OBJECTIVE
The twin objective of inventory management is

To maintain large size of inventories for efficient and smooth production as well as uninterrupted
sales operation.
To maintain a minimum investment in inventories to maximize profitability.

The firm should always avoid a situation of over investment or under investment in inventories. The major
dangers of over investment are unnecessary tie up of firms funds, excessive carrying cost and risk of
liquidity. Maintaining an inadequate level of inventories is also dangerous. Production hold ups and failure
to meet delivery commitment are consequences of under investment.

82

INVENTORY PROCUREMENT TECHNIQUES

An effective inventory management concentrates on question like
How much should be ordered?
When should it be ordered?

The inventory to be ordered in quantity is determined through the EOQ analysis. Economic order quantity is
the analyzed lot sized which involves minimum ordering and carrying cost. Apart from EOQ analysis the
inventory is also managed through the inventory turns norms or inventory turnover ratio. Varroc goes for
quantity discount option rather than EOQ if its profitable.

INVENTORY CONTROL TECHNIQUES

After the procurement the necessary materials is important to categorize, analyse and control the items. A
firm which carries a number of items in inventory that differ in value can follow a selective control system.
A selective control system such as,

ABC analysis,
VED analysis,
FNSD analysis,
GOLF analysis and
Input output ratio

They classifies inventory into different categories according to value of items, usage, rotation, obsolesces,
availability and significance. Accordingly control may be applied for items and next procurement policy is
framed.

Large numbers of companies these days try to maintain and control their inventory through scientific
approach like Just in Time inventory, this approach aims at least inventory maintenance and further
procurement of materials only at the time of requirement. This is only possible through strong bonding with
suppliers and efficient logistics management. Though this Japanese concept ensures high profitability for the
firm which adopts the practice but at the same time it is not as easy to do.

83

INVENTORY MANAGEMENT ORGANISATION OF VEPL-PN

PRODUCTION
PLANNING
CONTROL(PPC)
MATERIAL
MANAGEMENT
PURCHASE
GENERATION OF
PURCHASE ORDER
SCHEDULE TO
SUPPLIER
ARRANGEMENT OF
MATERIAL AS PER
REQUIREMENT
MONITORING OF
SUPPLIER
NEGOTIATION
PROCUREMENT OF
MATERIAL
SEGREGATION IN CASE
OF MATERIAL
REJECTION.
STORE
GENERATION OF GRN
MATERIAL
UNLOADING,AND
LOADING
PHYSICAL
VERIFICATION OF
INVENTORY
MAINTAIN STORE
INVENTORY(RM,FG)
MATERIAL ISSUE TO
PRODUCTION
REJECTION MATERIAL
RETURNS TO VENDOR.
FIFO
IMPLEMENTATION
PHYSICAL COUNTING
OF INVENTORY
DISPATCH
SUPPLY RIGHT
MATERIAL SA PER
SCHEDULE OF
CUSTOMER
FINANCE/ACCOUNTS
MANAGEMENT
INFORMATION SYSTEM
MATERIAL
REQUIREMENT
PLANNING
P
PL
MATERIAL
STORTAGE
REVIEW
GIVE
SCHEDULE TO
PURCHASE
GIVE
SCHEDULE TO
PRODUCTION

INVENTORY
CONTROL
PLANT HEAD OF
VEPL-PN
84

INVENTORY MANAGEMENT CYCLE OF VEPL-PN

SCHEDULE
FROM BAJAJ
MRP
PURCHASE
REQUISiTION
PURCHASE
ORDER
SCHEDUULING
MAIL TO
SUPPLIER
MONITORING
THE SUPPLIER
MATERIAL
INWARD(RM)
QUALITY
INSPECTION
STORE
ISSUE MATERIAL
FOR
PRODUCTION
MATERIAL LINE
FINISHED
GOODS
MATERIAL
OUTWARDS
CUSTOMER
BAJAJ
85

ACCOUNTS RECEIVABLES

Apart from Inventory Management and Cash Management, the Accounts Receivables is the next important
aspect for the working capital management. Accounts receivables are created by Trade Credits which arises
at the time of credit sales of goods and services during the ordinary course of business. Accounts receivables
are also known as Trade Debts or book debts. There are two types of credit i.e. Trade Credit which occurs
when one business firm sells to another, and Consumer Credit which occurs when a business makes a sale to
an individual. In India trade debtors, after inventories, are the major components of current assets. They
forms about one-third of current assets.

A firms investment in accounts receivables depends upon the volume of credit sales and its collection
period. The volume of credit sales is the part of total sales and total sales depends upon the variables like
market size, firms market share, product quality, degree of competition, economic conditions, marketing
strategy, capacity of the firm etc.
Formula:

Average Investment in Accounts Receivables = Daily Credit Sales * Average Collection Period.

CREDIT POLICY

Firms credit policy ranges between stringent to lenient. Under the lenient credit policy a firm tends to sell
on credit to its customers on very liberal terms and standards. Credits are granted for longer periods even to
those whose creditworthiness is less or nil. On the other hand firm follows stringent credit policy under
which a firm extends credit to those customers whose financial position is sound.

86

CHAPTER 4 ANALYSIS
RESEARCH FINDINGS
For all three years the average age of inventory is very long (30 days for 2008and 2009, 24 days for
2010) this indicates money is blocked in inventory for a long time. So we can say the Inventory
Policy of Management is not good and Inventory Management System of VEPL-PN is not efficient.
ABC Analysis does not properly followed up. Like for A category inventory is hold for 10 days. As
A class items are 80% of total value i.e. costly items.
No periodic review of critical items which are more important for flow of production and sale.
GRN pending due to material blocked due to Quality Inspection.
Unlatching of Physical Inventory with SAP stock due to human error, clerical mistake, variation of
usage (consumption material), and norms.
Due to fluctuations in demand, emergency purchase leads to more money loss due to premium
freight for vendor Material.
Lead times of suppliers are more. As most of suppliers are in Pune, Aurangabad, and Mumbai and
Out of country. For imported material it is 6 weeks and within country the lead time of supplier is 7-
10 days.
Excess of stock due to stock obsolescence, like in VEPL-PN, stock related to XCD-135 model is
obsolete because Bajaj doesnt make this bike in Pantnagar Plant.
Sometimes communication Gap between VEPL-PN and Bajaj leads to delay of order.
Delaying of order due to negotiation with supplier on price.
Frequent change in production plan sometime leads to emergency purchase of material and
sometimes leads to wastage of material.
Time loss due to arrangement of vehicle for customer supply and follow up with transporter for
material deliver on time.
Production loss due to defective material and line stoppage due to non-availability of material.
Due to fluctuations in demand, more money loss due to premium freight for vendor material and
wastage of material.
Production loss due to defective material and non-availability of material.
An inventory control technique does not properly follow.
As average age of inventory is very long (30 days for 2008and 2009, 24 days for 2010) this indicates
money is blocked in inventory for a long time.

87

RECOMMENDATIONS
As the main problem is average age of inventory is of long period. As the lead time of suppliers is
more so they have to maintain the inventory .So VEPL-PN should find supplier whose lead time is
less at the most it will be of 7 days.
The firm should adopt Just in Time (JIT) philosophy to achieve lowest possible level of inventory.
As 20% of the suppliers are within Pantnagar Region.
Material shortage review should be on daily basis and shortage report should be send to purchase
department on daily basis so that no losses in order delay and sufficient stock is maintained.
As demand fluctuation is another main problem, so management should consider the probabilities of
running out of stock, so firm must carry safety stock so that no delay in production and delivery of
orders. But management should not push investment in safety stock beyond the point where the
added cost of carrying inventory (Holding Cost) exceeds the saving gained by avoiding delays in
following orders. But it is difficult to estimate this point. Therefore, efforts should be directed to
those inventory items which account for significant rupee value of total inventory value (A category
items).
Physical counting should be category wise and periodic review of A, B, C items. A category item
should review after every 15 days. B category Item should review after 30 days and C class item
should review quarterly.
In store 1s, 2s should properly follow. Store should further divide into sub location like zones. Like
for PLATINA BIKE stock there should be different zone and for DISCOVER BIKES there should
be different zone. And RFID system should be there so that material can find out easily.
Inventory control system like (ABC analysis, EOQ Model) should properly implement.
Proper Material Requirement Planning (time scheduling, lot size of new order, proper production
planning) should be there. So no production loss and no delaying in orders.
There should be report on Manual production plan vs. actual plan.
Monitor Daily supply as per customer schedule so that no customer complaint should be there.
As non-availability of material leads to line stoppage so firm should enhance capacity with existing
vendor, and development of component with additional supplier so that no production loss.
There is cost loss due to holding nonmoving stock (like stock of XCD-135) so this stock should sold
to other manufacture or sold to interplant who make subassembly of XCD-135.
Varroc should adopt Conservative approach in managing its current assets. The excess liquidity
prompts the organization for excess production without the demand. This causes the increase in the
finished goods conversion period which effects the gross operating.
88

On the other hand Varroc should go for aggressive approach as far as its debtors conversion period
is concerned. Though it has improved considerably on its DCP but a further decrease would facilitate
the companys investment in marketable securities or decrease in the interest cost associated with
working capital loan.
It should go for further cash discount for reducing DCP.
Varroc should take up the facilities of the professional collection system from outside the firm which
would help in reducing DCP. Though Varroc takes up 40% of these services yet has 60% of its own.
In my point of view outsource 100% services of the efficient receivables collection firms
The cash budget is done on monthly basis which should be reduce to daily analysis and if not daily
than at least weekly. This would ensure effective cash tracking process of the organization.
Finally it should work out every possible effort to reduce the cash conversion cycle.

89

CONCLUSION

From the above study the conclusion could be bought out that in the absence of proper cash management
nothing would be in existence, neither the organization nor its practices. The cash management starts with
the inception of business idea and ends with the end of the organization. Thus it is very important for an
organizations executives to keep a constant on the daily cash inflows and outflows. The control of working
capital requires constant vigilance on the part of many executives in different departments like stores,
purchase, production and finance. In practice, the working capital investment which in the beginning of the
project is taken as 3 or 4 (25% to 33%) months of production expenditure would eventually reach 6070
percent of the total investment of the company, if proper control is not exercised. A firms net working
capital position is not only important as an index of liquidity but is also used as a measure of firms risk. All
other things being equal, the more the net working capital a firm has the less likely that it will default in
meeting its current financial obligations. Lenders such as commercial banks insist that the firm should
maintain a minimum net working capital position. If you have insufficient working capital and try to
increase sales, we can easily overstretch the financial resources of the business. So it is necessary to manage
Working Capital.
The objective of the project is to analyze the difference between the theoretical and the practical aspects
related to the Automobile Industry and further analyzing the practices involved in the Varroc Engineering
PVT. LTD.I compared my data with the competitors of Varroc.I have done a Operating Cycle Analysis,
Cash cycle Analysis and working Capital analysis with its competitors, and what I analyze in my 50 days
training have explain this in my findings.

90

BIBLIOGRAPHY

WORKING CAPITAL MANAGEMENT -BY V.K.BHALLA.
FINANCIAL MANAGEMENT -BY I.M.PANDEY.
Financial Management- An Analytical and Conceptual Approach by S.C
Kuchhal, International Management Institute, New Delhi.

WEB LINKS
www.varrocengg.com
www.varrocgroup.com
www.inventorymanagement.com
www.wikipedia.com
www.google.com

COMPANY REPORTS
Balance Sheet of a Company.

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